The Intrinsic Value of Cryptocurrencies.

As Bitcoin is currently up 40% in the last month, many different camps have began wiping out their crystal balls and making predictions as to how much Bitcoin will be worth in the next 6 months to 1 year. Some camps predict that it will reach 27,000 USD/ 1BTC while others (ahem Jamie Dimon ahem) are still of the opinion that it will be worthless one day, and continuously spread FUD. Here is my take on the subject- as a long term investor in cryptos.

To determine the long term drivers for cryptocurrency prices , we need to study the drivers that will drive the value of these cryptocurrencies up. At the end of the day, any currency is only as valuable as its usability, and the network willing to use it. The USD will not be as valuable if the whole world wasn't "forced" to buy a majority of its commodities with USD, or if 80% of global trade wasn't priced in USD.

The Long Term Drivers of CryptoCurrency Prices.

1. Useful store of value.

This property means that you can keep your savings locked up in the cryptocurrency. In a sense, it can be thought of as "Gold 2.0". Gold has been a popular store of value over the last few thousand years. Even though I am not interested in speculating or investing in Gold or cryptocurrencies with this property- I still believe that a cryptocurrency being a store of value is one of the BIG drivers of its long term price. As Gold has been so popular, I believe cryptocurrencies can serve this need even better, as a digital store of value- and you can be 100% sure as to the maximum supply of cryptocurrencies (scarcity is one of the main reasons gold is so valuable), as it is all set in the protocol.

So, what kind of valuation shall we ascribe to a coin that is useful as a store of value? Here's a simple example/calculation:

The current Gold market cap sits at roughly 7 trillion USD. Lets say Bitcoin completely replaces gold, as a store of value;

We know that Bitcoin's total supply is 21 million coins, so by simply calculating (market cap of gold)/ (total coins) we will roughly get USD 350,000 per bitcoin.

Again, its very ambitious to believe that Bitcoin will be able to reach Gold's market cap, but I am using upper boundary assumptions for my calculations. By tweaking the assumptions, you might be able to get something more reasonable (ie. If you believe Bitcoin is worth half Gold, you will value Bitcoin at roughly USD 175,000 per Bitcoin.)

Its also worth noting that it is still relatively unknown, how much total Gold there is in the world with Reuters reporting that there is a total supply (mined or un-mined) of 171,300 tonnes and other reports claiming that there is a total of 2.5 million tonnes of gold- this would imply a market cap of 100 trillion USD for Gold. This is precisely why I think Bitcoin can become Gold 2.0, because the total supply of Gold is unknown, whereas bitcoin is known.

2. Useful for transactions

One of the main elements I look for in determining the long term price of cryptos is its utility in facilitating transactions. Why? Because you can actually research a cryptocurrency to see if it'll be useful for certain kinds of transactions, and if it is then you know with some probability that it'll "win" in that particular niche. If you find a handful of coins that are attacking a niche, you can just invest in all of them and be sure that one of your horses will make it in the future. You might be wondering: How many niches for cryptocurrencies are there really-- won't there just be one coin to rule them all? And my answer is: no, absolutely not. I firmly believe that our monetary ecosystem in the future will consist of a plethora of coins, all coexisting and serving a different niche of transaction types. One coin might end up becoming a dominant means of converting between other coins, but even on today's exchanges that's not the case, and even if that does happen, other coins will still need to be used to do particular types of transactions that the main coin isn't well-suited for. To convince you that this will the case, below are just a few transnational niches that certain coins are already dominating today:

• Transaction speed: Some coins, like Dash and NEM, focus exclusively on making their coins very, very fast for transactions. These coins want to be used for things like brick-and-mortar retail, where anything more than a few seconds of transaction time is completely unacceptable. In order to achieve their speed, though, they make sacrifices in terms of the features they support (and in terms of security, but we won't worry about that). Why do they make these sacrifices? Because supporting more features slows you down unnecessarily and if all you care about is winning on speed for very basic transactions. These currencies have problems with fixed-supply, but they definitely win in the speed category for now.

• Derivatives contracts: Some coins, most notably Ethereum, specialize in supporting a programming language for transactions on their network, at the expense of having a lower transactions-per-second and higher fees than other coins. The benefits of having this programming language, however, allow Ethereum to specialize in extremely high-value transactions that aren't possible with other types of cryptocurrency. The most notable of these, in my opinion, is the implementation of derivatives contracts (I will focus on this in my following article).

3. Privacy/ Anonymity

Many think that bitcoin specializes in this, but that's actually not the case. Bitcoin transactions are very traceable, and it's very easy for the police to figure out where funds came from unless you take great strides to put your money through a "mixer" that obfuscates who sent what to whom. Monero is a currency that implements this mixing directly into the protocol, and ZCash is a similar currency that goes even further than Monero and completely encrypts transaction amounts using a mathematical technique known as a zero-knowledge proof. So, why couldn't another coin just add this functionality? Because it's extremely slow to do transactions this way, especially the ZCash way, and you would never want to do it unless you absolutely have to. Even if you don't care about speed, implementing smart contracts or derivatives contracts on top of something that's obfuscating transactions is extremely difficult, and probably impossible.

4. Price Stable Currencies.

To me, this is the most promising category of all in terms of long-term adoption. These currencies aim to "peg" the value of their coins to another asset, for example USD, by effectively "splitting" themselves into two currencies: a volatile asset, and a price-stabilized asset (like with Steem did with, Steem Power and SBD). They then allow the supply of the price-stabilized asset to grow and shrink, in order to maintain the peg, by holding auctions and converting the price-stabilized asset into the volatile asset, which effectively grows/shrinks the supply. For example, BitShares has a cryptoasset known as BitUSD, that's always worth approximately 1 USD , and grows and shrinks by effectively converting itself into a volatile asset called BitShares . In that sense, BitShares implements what can be refereed to as an "algorithmic central bank."